Do you have too much money invested in cash?

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1 Issue 0 Winter 04/5 Financial Viewpoint Your latest newsletter from Unique Financial Planning Do you have too much money invested in cash? Is your Cash ISA under attack from inflation? If you started saving in a Cash ISA when they were first introduced in 999 and continued to invest every year to date*, you could have saved over 7,000. But with the Bank of England s Base Rate remaining at 0.5% since 009, the spending power of these savings has effectively been diminished when you have taken inflation into account. In fact, you would have had to earn interest of.9% over the last five years for your savings to have beaten inflation. And looking at the current Cash ISA best buys, it would seem unlikely you d achieve that from a bank or building society. You could have 7,000 (plus interest) in your cash NISA The case against raising interest rates While there s talk about the prospects of an interest rate rise, Neil Woodford, Head of Investment at Woodford Investment Management, argues there s no need for UK interest rates to rise until 06 thanks to a number of factors: UK households remain burdened by too much debt (household debt-to-income ratio hit a record high of 40% in 0) 4 Household cash flows remain very sensitive to rate rises UK labour market dynamics have changed. With over million people in part-time employment preferring a fulltime job, and many more in self-employment UK inflation remains low and appears to be heading lower So, with interest rates at an all-time low and looking to remain so for the foreseeable future it s time to consider transferring your Cash ISA savings to a Stocks and Shares ISA investment and avoid the effects of inflation on your savings. 0/ 5,40 04/5 5,000 0/ 5,640 0/4 5,760 And the great news is that following the introduction of the New ISA (NISA) legislation in July 04, you can now switch your Stocks and Shares ISA investments back to Cash ISAs if interest rates get back to a level that means your spending power won t be eroded. 008/09, /0,600 00/ 5,00 The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. 004/05 005/06 006/07 007/08 Tax concessions are not guaranteed and may change in the future. 999/00 000/0 00/0 00/0 00/04 This Is Money.9% that's the magic number: It's at least what savers needed for the past five years to beat inflation Moneysavingexpert.com Best Buy Cash ISAs on 7 November 04 Hargreaves Lansdown Neil Woodford: Rate expectations 4 BBC News UK household debt hits record high * As at 0 November 04 Talk to us about inflation-beating investments There are numerous multi-asset investments available to investors who are uncomfortable taking too much risk with their money. Many of these have delivered significantly higher returns than cash over the last five years. Get in touch to find out more. COPEN9 Exp...05

2 Changes to your pension from April 05 In his Spring 04 Budget, the Chancellor announced changes that will affect your pension savings when you retire. The government has since published the latest version of the Taxation of Pensions Bill which helps clarify these changes. What we know already Flexible access from age 55 From April 05, those aged at least 55 will have freedom over how they take money out of their pension fund. Restrictions on pensions contributions The normal 40,000 annual allowance will reduce to 0,000 if you make any withdrawals from your pension in addition to any tax-free cash. Retirement age changes Set to increase to 67 from 08. What s new Freedom over how you take your tax free cash (PCLS) Most people can take up to 5% tax-free cash from their pension. From April 05, you can either take the tax-free cash all at once, or have a portion of any withdrawals you make paid tax-free. For example, if you have a pension fund worth 00,000, you could: Take the 5,000 tax-free cash all at once, with subsequent withdrawals taxed as income. Make a series of withdrawals over time and receive 5% of each withdrawal tax-free (eg. for a lumpsum withdrawal of 0,000, you would receive 5,000 tax-free; for monthly withdrawals of,000 you would receive 50 tax-free, with 750 subject to income tax). This second option could help you manage your tax liability more effectively. 55% pension death tax to be abolished It s normally only possible to pass a pension on as a tax-free lump sum if you die before age 75 and have not taken any tax-free cash or income. Otherwise, any lump sum paid from the fund is subject to a 55% tax charge. From April 05 this tax charge will be abolished and the tax treatment of any pension you pass on will depend on your age when you die. If you die before age 75, your beneficiaries can take the whole pension fund as a lump sum tax-free. If you die after age 75, your beneficiaries have three options: Take the whole fund as cash at once. The pension fund will be subject to 45% tax. However, it has been proposed this should be changed to the beneficiarys marginal rate of income tax from 06/7. Take a regular income through income drawdown or an annuity (option only available to dependants). The income will be subject to your beneficiary/s marginal rate of Income Tax. Take periodical lump sums through income drawdown. The lump sum payments will be treated as income, and therefore subject to your beneficiary/s marginal rate of Income Tax. While a pension continues to support those in retirement, it could now also enable one generation to support the next. HM Revenues and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen. The freedom granted by these pension changes is good news for all pension savers but, without professional financial advice, many people could end up making uninformed decisions and paying unnecessary tax. If you are looking to access your pension in 05, please talk to us to better understand your options. This information is based on our interpretation of the current version of The Taxation of Pensions Bill as published on November 04 and is subject to change. COPEN97 Exp

3 Pension planning for the self-employed There are 4.5 million self-employed people in the UK and less than a third have any kind of pension arrangement. That's a shocking statistic when you consider that State support is shrinking and we re all living longer. Of course, saving for a pension when you re self-employed is not as straightforward as it is for an employed person, who might automatically benefit from a workplace scheme and employer contributions. We ve outlined some key points below for you to consider. Don t rely on the State Pension Whether you re employed or selfemployed you re entitled to the full basic State Pension (currently.0 a week) as long as you ve paid in 0 years of National Insurance Contributions and you retire after 6 April 06. On its own then, State support is unlikely to enable you to maintain your current standard of living into retirement. That s why it s imperative for the self-employed to find other ways to provide the additional income needed in retirement. Start saving early It s stating the obvious, but the sooner you start saving into a pension the bigger your potential retirement fund. You ll also have more time to benefit from the tax relief that s available. To highlight the importance of saving early, a 5 year-old male looking to retire at 67 would need to contribute 56 per month in order to achieve a retirement income of 5,000 a year. 4 If the same man had waited until he was 45 before he started saving, he would need to contribute 79 to achieve the same level of income an additional 8 per month. 5 Minimise the amount of tax you pay One of the main benefits of paying into a pension is the tax relief the savings attract. For example, if you re a basic rate taxpayer paying 80 into your pension each month, HMRC will effectively add an extra 0 6 in tax relief. The maximum amount you can save each year that attracts tax relief (otherwise known as the annual allowance) is 40, Importantly, if your income is low and you re not able to save the full 40,000 in one tax year, you can carry forward any unused allowance 8 and use it against earnings in the next tax year. Please note: you must have been a member of a registered pension scheme during the years you want to carry forward your tax relief is limited by your annual earnings in the year you want to carry forward you can only carry forward unused allowance from the three previous tax years What type of pension is right? The self-employed can choose from a range of different pension products, including stakeholder pensions, personal pensions and Self Invested Personal Pensions (SIPPs). Each has its advantages and disadvantages we can advise on which is best for you. Perhaps the most flexible pensions are stakeholder schemes. They allow you to save as little as 0 per month and the charges are relatively low, which is helpful if you have irregular income levels. HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes, which cannot be foreseen. Talk to us If you re self-employed and need advice about your pension planning, please get in touch to discuss your options. loads/04/05/just-the-job-or-a-working-compromise- FINAL.pdf loads/04/05/just-the-job-or-a-working-compromise- FINAL.pdf COPEN90 Exp

4 How tax efficient is your pension? The main purpose of a pension is to build funds for your retirement in the most tax-efficient way possible. You may contribute regularly to your pension, but do you take full advantage of the tax benefits it offers you? For instance, did you know your pension could help you reclaim valuable personal tax allowance and even Child Benefit? Over the lifetime of your pension, these potential benefits could contribute significantly to the funds available to you at retirement. Here are four examples of how your pension could work harder for you. Use contributions to realign Personal Allowance for high earners (over 00,000) Nearly everyone who lives in the UK is entitled to an Income Tax Personal Allowance (the amount of income you can receive each year without having to pay tax on it). This Personal Allowance is reduced by for every of taxable income over 00,000. By making a pension contribution, you could reduce your taxable income, and reclaim your allowance. This is particularly valuable if you have a taxable income of between 00,000 and 6,0. Prevent the erosion of Child Benefit Since 7 January 0, if you re a parent earning more than 50,000 the amount of Child Benefit you receive reduces. It goes completely once earnings hit 60,000. A pension contribution can help you reduce your earnings and therefore allow you to reclaim Child Benefit. 4 Maximise tax relief on contributions /minimise tax on pension income The government encourages you to save for your retirement by offering tax relief on your pension fund up to a certain amount. Through efficient planning, you may be able to receive tax relief at a rate higher than the Income. Tax-rate you d pay on your retirement income. Paying in more than your annual allowance You are allowed to pay up to 40,000 annually into your pension. Contributions above this amount are subject to tax penalties. 4 However, in certain circumstances, you can exceed your annual allowance without penal tax charges applying. This is because you can carry forward three years worth of unused annual allowance meaning, subject to earnings, you may be able to claim valuable tax relief. HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes, which cannot be foreseen If you d like to explore your pension in more detail, please get in touch. COPEN98 Exp

5 Do you run your own business? If you do, you probably have one or more key employees that are integral to its success. They may even possess the skills, knowledge, experience or leadership that makes a vital difference to your bottom line. But have you considered what would happen if they suddenly died, or suffered a critical illness that forced them to be absent from work for a long period of time? If the unexpected happened, it could pose a serious risk to your business. Protect the most important assets You may have covered the tangible assets of your business, but have you protected the most important assets: the people that directly contribute to your profits? Key Person Protection is a simple way for you to insure your business against the losses you might suffer as a result of the death, or critical illness, of a key individual. To find out more about our full range of Business Protection products, please get in touch. COPEN9 Exp

6 Leaving a legacy You ve worked hard to create wealth. You may have taken risks, devoted long hours to building a business, or made sacrifices to establish your investment portfolio. At the same time you ve probably paid considerable amounts of tax, be it Income Tax, Corporation Tax, Capital Gains Tax, Stamp Duty, or National Insurance. And then, of course, there s Inheritance Tax (IHT). While IHT may be a concern for you and your heirs, there is more to estate planning than simply tryingto reduce the Chancellor s slice of your legacy. Inheritance Tax: the basics At its simplest, IHT is a 40% tax, generated on your death, that applies to the amount by which your estate exceeds the nil rate band (currently 5,000). While most estates are too small to be subject to IHT, those that are above the starting point face an average bill of nearly 70,000. If you think you ll leave an IHT bill, you should either make provision for it (for instance, through a Life Insurance plan), and / or consider taking advantage of the various reliefs and exemptions that can help reduce your liability. You can also make a number of gifts during your lifetime that will be IHT exempt unless they are made within seven years of your death, in which case IHT will apply. The importance of professional advice In theory estate planning is simple: to avoid any inheritance tax you need to make sure you ve made sufficient gifts, long enough ago, to mean that on death (with a valid Will) your estate is worth less than the available nil rate band. With professional advice, you can create robust plans that will help you achieve this. Talk to us about estate planning HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes, which cannot be foreseen. As a starting point, it s important to think about what you would want to happen to your wealth on your death. For instance: What should any surviving spouse or partner inherit? Who are your (other) chosen beneficiaries? Are there specific items you want to leave to particular people? What framework if any is needed for your bequests? For example, you might be happy to leave capital outright to a 40 year-old architect daughter, but the same may not be true of a 9-year old student son. Where there s a Will A Will is key part of successful estate planning not just because it sets out what you want to happen after your death, but also because it covers a number of other important aspects. For instance, if you die without a will, the rules of intestacy determine how your estate will be distributed. As well as creating the potential for family squabbles, this is unlikely to reflect your wishes and it could create an unnecessary IHT bill. If you need to write a Will, we can refer you to an expert to prepare it for you. nationalarchives.gov.uk: inheritance tax analysis of receipts COPEN9 Exp

7 The most valuable gift you can buy? Life and Protection Insurance policies (sometimes known as Family Protection ) offer a financial safety net for you and your loved ones, should the worst happen. They can provide a regular income or cash payout to ease the financial burden of: death serious injury or illness unemployment (as an additional cover with certain policies) Which policy is right for you? Life Insurance can provide financial security to those who depend on your income when you die. It could pay off your mortgage, or provide an income to help cover things like regular household bills. The most appropriate type of Life Insurance will depend on your circumstances Term Insurance pays out a lump sum if you die within the agreed term (the amount of time you have chosen to be covered for, eg. 0 years). Family Income Benefit Insurance pays out a regular income, instead of a lump sum, to provide ongoing financial support for those who depend on you. Critical Illness Insurance pays out a tax-free lump sum on the diagnosis of certain life-threatening or debilitating conditions, like cancer, heart attack or stroke. You may decide to buy Critical Illness Insurance when taking on a major commitment, like a mortgage or starting a family, but it can be bought at any time to provide peace of mind. Income Protection Insurance pays out a regular, tax-free income if you become unable to work because of illness, injury or unemployment. It could help you keep up with your mortgage or rent payments, as well as other living costs, until you re able to return to work. Things change and so should your cover You may already have one or more of the above in place, but it s still worth reviewing your current cover levels. Personal circumstances can change regularly so it s important to ensure your level of cover remains appropriate. Whole of Life Insurance pays out a lump sum when you die, whenever that is, as long as you are still paying the premiums. Contact us today for a Life and Protection Insurance review. COPEN99 Exp

8 The Autumn Statement We've summarised the key points from George Osborne s Autumn Statement, which was delivered to Parliament on December 04. Income Tax In March 04, the Chancellor confirmed the personal allowance would rise by 500 in 05/6, to 0,500.The Autumn Statement has added another 00 to this, bringing the 05/6 personal allowance up to 0,600. As in the past, some of this increase will be clawed back by reducing the basic rate band, on this occasion by 80 (to,785). Capital Gains Tax (CGT) In 05/6 the Capital Gains Tax annual exempt amount will rise by 00, to,00, as previously announced. 4 Inheritance Tax The Inheritance Tax (IHT) nil rate band, which has been frozen at 5,000 since April 009, will remain unchanged until at least April Individual Savings Accounts (ISAs) For 05/6 the investment limit will increase in line with inflation by 40 to 5,40. 5 The so far little-used Junior ISA (JISA) will have its investment limit increased by 80 to 4, From December 04, if an ISA investor in a marriage or civil partnership dies, their spouse/civil partner will effectively inherit their deceased partner s ISA tax advantages. In addition, from 6 April 05, the surviving spouse/civil partner will be able to invest as much into their own ISA as their spouse/civil partner used to, on top of their usual allowance. 5 The housing market The big surprise in the Autumn Statement was a reform of the Stamp Duty Land Tax (SDLT) rules for residential property. On 4 December 04, a tiered approach similar to that used for Income Tax was introduced. There are now five tax bands: 5 Band of residential property value Tax rate % 0 5, ,00 50,000 50,00 95, ,00,500,000 0,500,000+ Business taxes The main rate of corporation tax is currently % and will fall to 0% from April 05, bringing it into line with the unchanged small profits rate. The Chancellor once again extended the small business rate relief for a year. 6 HM Revenues and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen If you would like guidance on how the Autumn Statement might affect you, please get in touch. TIIN_80_income_tax_personal_allowance_and_basic_rate.pdf TIIN_80_income_tax_personal_allowance_and_basic_rate.pdf 4. _Capital_gains_tax_-_annual_exempt_amount.pdf 5. _Summary.pdf 6. Unique Financial Planning Unit 8 Shrivenham Hundred Business Park Majors Road Watchfield SN6 8TZ info@uniquefinancialplanning.co.uk COPEN9 Exp...05